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House Renews Flood Insurance Program for Five Years with Plans for Overhaul

Source: WSJ - Siobhan Hughes

Posted on 13 Jul 2011

Setting the stage for higher rates in an effort to put the program on sounder financial footing, the House voted Tuesday to renew the federal flood-insurance program for five years.

The House voted 406-22 to reauthorize the program through fiscal 2016. The program will expire on Sept. 30 unless Congress acts.

House Financial Services Committee Chairman Spencer Bachus (R., Ala.) said the bill would help provide a boost to the housing market by ensuring potential home buyers can obtain flood insurance when required to secure financing.

Flood insurance is required for mortgages on properties in flood-prone areas; lawmakers of both parties want to renew the program in order to avoid putting new pressure on real-estate markets. But Congress also wants restructuring because many property owners pay below-market rates that don't fully reflect the risks of flooding.

In a June report, the Government Accountability Office said that almost one in four policyholders pays a subsidized rate that doesn't reflect the full risk of flooding. Currently, the subsidized premiums cover only 40% to 45% of the cost of covering the full risk of flood damage, the auditors found.

The legislation would phase out the subsidies, with owners of commercial properties, second homes and vacation homes facing increases of 20% a year until their premiums reflect the risks of flooding. Homes sold to new owners wouldn't be eligible for the subsidies.

Lawmakers also want to encourage the development of a private flood-insurance market, which is virtually nonexistent now. Under the measure, the

FEMA chief and the U.S. comptroller general would have to conduct studies aimed at evaluating ways to privatize the flood insurance program. Still, one potential problem is that private insurers might cover only the lowest-risk properties, exposing the government to potentially bigger losses.

The studies would also have to look at whether reinsurers could cover some of the flood risk. The U.S. flood-insurance program currently doesn't buy reinsurance, but instead covers catastrophic losses by borrowing from the U.S. Treasury. As a result, the program had almost $18 billion in debt as of June, government auditors found, reflecting loans outstanding from 2005 hurricanes Rita, Katrina and Wilma.

Lawmakers found in a report accompanying the bill that it was unlikely that the program would have enough money to repay the loans in the next 10 years.

Last year Congress voted to extend the program through September. Congress has relied on temporary fixes because of an inability to reach agreement on the future of the program.